Mongolia looks at equity for royalties swap in big mining projects

ULAN BATOR Feb 5 (Reuters) - Mongolia is looking to revive
stalled foreign investment in large mining projects by
considering a reduction of its equity stake in strategic mines
in exchange for higher royalties, according to a government plan
due to be unveiled on Friday.

The country holds some of the world's largest copper and
coal deposits but its economy has been held back by disputes
with foreign investors over assets such as the $6.5 billion Oyu
Tolgoi copper mine.

Anglo-Australian miner Rio Tinto has stalled a $5.4 billion
underground expansion project at Oyu Tolgoi because of arguments
over cost overruns and $30 million in tax that the government
says it owes.

On Friday, Prime Minister Chimed Saikhanbileg will propose
in parliament an amendment to the mineral resources law to allow
the government to exchange state-owned equity in "strategic
mines" for higher royalties, according to a spokesperson for the
prime minister.

Higher royalties would help the government earn more from
the mine faster than under the current scheme. With equity,
Mongolia must wait until after investors recuperate their
initial costs before receiving dividends for its shares.

"Without phase two there's limited value in the project to a
strategic investment," said Nick Cousyn, chief operating officer
for Ulan Bator-based broker BDSec. "Going forward with phase two
will unlock the option for Mongolia to choose higher royalties
or keep their equity."

Mongolia has 16 strategic deposits, including Oyu Tolgoi and
the Gatsuurt gold deposit currently licensed to Toronto-listed
miner Centerra Gold Inc. These deposits have the potential to
generate at least 5 percent of the country's GDP.

The government currently takes a minimum of 34 percent
equity in strategic deposits but could ask for up 50 percent if
state funding was used for exploration.

Some Mongolian MPs have repeatedly demanded a larger stake
in Oyu Tolgoi. Others have invoked Resolution 57, passed in
2009, which states that the government can negotiate to increase
its stake to 50 percent once investors earn back their initial
investment.

Rio has consistently rejected requests to renegotiate the
investment agreement they signed for the mine in 2009. However,
implementing the terms the prime minister has suggested may
require some sort of renegotiation.
(Reporting by Terrence Edwards; Editing by Jake Spring and
Vincent Baby)